How do you react when your child asks for money to buy a present for a sibling, a friend, a teacher, or even for you? Most parents will take them to the store, let the child pick out the gift, and then pay for it. Or, if the child is a teenager, you may give him a certain amount of money and let him buy it himself.

While the reason the child needs money is unselfish and properly motivated, you should still not just hand over cash or your credit card. “Why not?” you ask. After all, it is for a good reason.

As parents, we should constantly be looking for ways to educate our children and how to manage money is one of the most important lessons we can teach them. There are two ways to make this situation a positive learning opportunity.

First, let’s look at allowances:

1. Setting a reasonable allowance for children is a good thing. Notice the key word: reasonable. No 5-year-old needs a $20 per week allowance. Just give them a little to reward them for picking up their toys every day, for helping to put away the laundry, or for clearing the table. One or two dollars a week is more than enough at that age.

2. However, these allowances should be based on an expectation of certain tasks being performed before the allowance is given. It should never be given just to give your child a little spending money. Children need to learn from an early age that “money does not grow on trees” and that is must be earned.

3. Tasks should be added to as the child gets older and should be compensated for with more money. As your child gets older, they need more money and they should have it if they earn it by doing harder chores around the house.

4. An expectation of participating in the family is beneficial to your child, as well as to you. By participating, I mean that they join in family meals, activities, and chores. You should not be expected to clean up after your child if they are physically capable of doing it themselves.

5. Have a clear, possibly written, expectation for both you and your child about what chores are compensated by allowance, which chores are just something they are expected to do because they are part of the family, and which chores may create extra money for them (see below for more details).

6. Allowances can be budgeted to include the buying of gifts. Teach your child to save a little of their allowance for unexpected things that come up, just as you do with your paycheck. This can be done starting in grade school.

7. Learning to live within the budget they have is a valuable lesson in life. We all need a refresher course at times! But a child that has learned how to do that will carry it on into adulthood and will be better off financially than we are.

8. Teach them to bargain hunt. Gifts from certain stores will be a better value for the money than from others. You know it; teach your children.

Second, sometimes they just need more money than their allowance savings can cover. What do you do then?

1. If they are old enough to get a part-time job, they should do it. It does not hurt a child to work a few hours per week. It builds their self-esteem and creates a work ethic that will follow them throughout their lives. Besides that, it keeps them busy. A busy child has little time to get into trouble.

2. Children that are too young to work can do chores for neighbors. Many successful entrepreneurs started out as kids going around the neighborhood mowing lawns or cleaning out gardens. You could be creating a child who will one day be the next Bill Gates.

If you don’t want to have your child working for others for whatever reason, there is another option.

1. Make a list of chores to be done that are not usually done by your child. Perhaps it is doing some laundry, cleaning the oven, waxing the car, ironing, cleaning out the fridge, washing the dog, and whatever else you can think of.

2. Assign a monetary value–a bonus–to each of these tasks.
This needs to be appropriate to the task.
For instance, cleaning out the fridge may generate more bonus money than cleaning a self-cleaning oven. Be clear that the bonus is only paid if the job is done to your satisfaction.

3. Your children can pick which task(s) they want to do based on how much they could earn. I had a big surprise when we started this. I expected they kids to pick all the easy tasks and leave the hard ones. Instead, they all picked the hardest tasks because they paid the most.
They told me that they realized that they could earn more quicker doing one big task for $20 than doing four little ones for $5–an unspoken lesson in putting a value on time!

4. Inspect the work and praise them verbally. If they have done a good job, give them many compliments. If they must re-do some part of it, praise what they have started and give them specific guidance on how to complete the project correctly.

5. Pay promptly. Remember, they did not do it because they had to–they did it for money. If you want them to repeat this process, they need immediate gratification.

6. Never let this become a source of conflict in the family. Choosing to do these projects is strictly voluntary. If they do not do any of them, fine. If they don’t do them correctly, fine.

7. Always remember that your child does not get paid on no work or on shoddy work. It is not a fight. It is an agreement that both parties must live up to. Don’t argue with them, just don’t pay them. If you stick to that, don’t be surprised if you come home one day and the chore is done–and done well.

This is a wonderful opportunity to help yourself out while you are teaching your children about money. Every Christmas season, I had a spotless house and I gladly doled out the cash!